Emerging energy exporters’ bonds tumble as oil hits 4-yr lows

RBC Capital Markets Chief Commodities Strategist Helima Croft discusses the price of oil on “Bloomberg Surveillance.

Tumbling oil prices fuelled a heavy fall in the dollar bonds of energy exporting emerging nations on Tuesday, with Venezuela and Ecuador leading the pack as investors fretted about their ability to repay debt.

Ecuador’s yield spreads over U.S. Treasuries – a measure of the premium investors demand to hold a credit relative to safe-haven U.S. Treasuries blew out 33 basis points on the EMBI Global bond index of emerging debt to 523 bps

Venezuelan spreads increased 41 basis points to 1558 bps.

In contrast, the average spread on the underlying EMBI Global index widnened just 6 bps.

The sell-off took place as oil prices extended losses, pushing Brent crude futures through $83 per barrel to a new four-year low while U.S. futures were down 2 percent to trade at two-year lows.

Brent is down more than 25 percent this year, a severe shock to countries from Venezuela to Russia for whom oil is their mainstay.

“Credit markets are starting to pay attention to the knock-on effects of lower energy prices. With oil below $78, now down more than 25 percent since June, hard currency earnings may be seriously hit in countries that rely on crude exports,” said Peter Marber, head of emerging markets investments at Loomis Sayles in Boston.

“Venezuela and Ecuador seem the most vulnerable, but Russia also may be at risk given the country’s relatively high cost of production,” Marber added.

Oil accounts for the bulk of total exports for both Ecuador and Venezuela, data from the Organisation of Petroleum Exporting countries (OPEC) shows. Both countries are working on a joint proposal to defend oil prices that they plan to present at the next OPEC meeting.

Ecuador’s $2 billion 2024 bond, sold in June when Brent was over $100 a barrel, was 1.75 cents lower while Venezuela’s benchmark Global 27 bond fell one cent in price.

Russian and Angolan yield spreads over U.S. Treasuries were up 10 basis points while other African oil producers Ghana and Nigeria saw spreads widen 5 bps.

“When your main export is falling, at the end of the day that is negative from a debt sustainability point of view,” said Michael Ganske, head of Emerging Market debt at Rogge Global Partners which manages $57 billion.

The oil price moves and the impact on producer nations could have serious implications for the world economy, with a BNP Paribas study showing this week that energy-exporting countries set to pull “petrodollars” out of world markets this year for the first time in almost two decades.

The author of that study, David Spegel, reckons credit ratings downgrades are a matter of time should oil prices continue to slide, with many investment grade credits such as Russia in danger of falling into junk.

If U.S. futures slip towards $70 a barrel – around $6 lower than current levels – and stay there a while, Russia and Ecuador would warrant a one-notch downgrade and Kazakhstan a two-notch ratings cut, Spegel estimates.

“Angola is one of the worst credits in EM for sustained negative oil pressure. It would be downgraded 3 notches. Gabon is equally bad, also warranting a 3 notch downgrade. Nigeria would be downgraded 1.1 notches,” he added.


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